Ensuring Procedural Fairness and Evidentiary Rigor: A Case Analysis of DCIT v. Hitel Nitin Shah

Introduction

The case of DCIT v. Hitel Nitin Shah[i] involves an appeal filed before the Income Tax Appellate Tribunal (‘Tribunal’) by the Assessing Officer (‘AO’) against the appellate order passed by the Commissioner of Income-tax (Appeals) Mumbai (‘CIT(A)’). This case presents a crucial examination of the procedural fairness and evidentiary requirements under Section 68 of the Income Tax Act, 1961 (‘IT Act’), shedding light on the importance of thorough inquiries and adherence to principles of natural justice in assessment proceedings.

Facts

• The case involved an appeal filed by the AO against the order of CIT(A) for the assessment year (‘AY’) 2012-13. The CIT(A) had allowed the appeal filed by the assessee against the assessment order passed under s. 143(3) of the IT Act.

• The assessee, in his return filed in 2012, declared an income of approximately Rs. 3 crores. A survey under s. 133A of the IT Act was conducted against this, revealing the accommodation entries and bogus purchases. The AO issued a notice to treat the loans as unexplained cash credit under s. 68 of the IT Act, despite the assessee’s submission that the loans were genuine, the AO added Rs. 2.5 crores to the total income. The assessee challenged this before the CIT(A).

• The assessee argued that the addition was made without concrete evidence and an opportunity for cross-examination. The assessee provided documentation to prove the identity, creditworthiness, and genuineness of the loan transactions.

• CIT(A) found that the assessee had discharged the primary onus by providing necessary documents and noted that the transactions were through bank accounts, interest was paid, and the loans were repaid in 2014. The CIT(A) also stated that the proviso to s. 68 of the IT Act requiring proof of the source was not applicable to the AY in question. Thus, the addition was deleted, against which the present appeal was filed.

• The assessee had passed away on 30.05.2021; however, the CIT(A) issued the order in his name. The AO initially filed an appeal using Form 36, listing the deceased assessee, which was contended by the assessee, now the respondent here. Upon realizing this, the AO filed a revised Form 36, naming Hetal N Shah, the legal heir, as the respondent. The Tribunal accepted the revised Form 36, considering the procedural error by CIT(A) in naming the deceased, and found the AO's appeal valid. Consequently, the arguments regarding the invalidity of the AO's appeal were dismissed.

• Regarding the merits of the case, the appellant strongly supported the AO’s order, arguing that the loans taken by the assessee were not genuine. Consequently, they contended that the CIT(A) erred in deleting the addition.

• The respondent argued that the assessee had met the initial burden of proof by providing substantial evidence, including bank statements, income tax returns, confirmations, and lenders' financial statements. The respondent emphasized that the loans had been repaid, and repayment confirmations were furnished. Despite this, the AO rejected the evidence without verification and based the addition solely on third-party statements recorded without the assessee's knowledge, without providing copies, and without allowing cross-examination, violating natural justice principles. Furthermore, these third-party statements had been retracted, diminishing their evidentiary value.

• Citing various judicial precedents, including those from the Supreme Court and High Courts, the respondent argued that such additions are invalid when statements are retracted and cross-examination opportunities are denied. The respondent also highlighted that the repayment of loans negates additions under s. 68 of the IT Act, underscoring that the assessee had met the burden of proof. Consequently, the AO’s addition was deemed invalid, and the CIT(A) rightly deleted the addition, recognizing the assessee's compliance with s. 68 of the IT Act.

Held

• The Tribunal, while dismissing the AO's appeal, confirmed the deletion of the addition under s. 68 of the IT Act. It held AO failed to conduct necessary inquiries and violated principles of natural justice by relying solely on retracted third-party statements without providing the assessee with an opportunity for cross-examination.

• The court further observed that despite the substantial evidence provided by the assessee, including bank statements, income tax returns, and loan repayment confirmations, the AO's addition under Section 68 was deemed invalid.

• The Tribunal upheld CIT(A)’s decision to delete the addition, emphasizing the importance of procedural fairness and the assessee’s fulfilment of the burden of proof regarding the identity, creditworthiness, and genuineness of the lenders and transactions.

Our Analysis

The decision is important as it underscores the necessity for AOs to conduct thorough inquiries and adhere to principles of natural justice when making additions under s. 68 of the IT Act. The Tribunal's ruling highlights that merely relying on unverified third-party statements, especially those retracted without allowing cross-examination, is insufficient grounds for such additions. This case reaffirms that the burden of proof initially lies with the assessee to provide credible evidence of the transactions' identity, creditworthiness, and genuineness. However, once this onus is met, the AO must rigorously examine the evidence and provide opportunities for cross-examination to uphold fairness and legality in assessment proceedings.

End Note

[i] [2024] 159 taxmann.com 1618 (Mumbai - Trib.) [22-01-2024].

Authored by Pranav Dabas, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.